Wacker Chemie AG

Thank you, operator. Welcome to the Wacker Chemie AG Q2 2017 Conference Call.

My name is Jörg Hoffmann, and I'm the Head of Investor Relations at WACKER. With me are Dr.

Rudolf Staudigl, our CEO; and Dr. Tobias Ohler, our CFO, who will take you through our presentation in a minute.

The presentation is available on our website under www.wacker.com, under the caption Investor Relations. Before I begin, please have a look at our safe harbor statement, which you'll find at the beginning of the deck.

With this, let me now hand you over to Dr. Staudigl, CEO.

Dr. Staudigl?

Ladies and gentlemen, welcome to our Q2 2017 conference call. We recorded today Q2 sales of €1.2 billion, 2% over last year and at the level of Q1, driven mostly by volumes.

Our Q2 EBITDA of €253 million is 11% over Q1 and only 4% behind last year, despite substantial increases in raw material prices. Again, our performance is driven by the dynamic evolution of our chemicals businesses, which saw strong volume gains year-over-year.

Despite higher raw material costs, our chemical segment's EBITDA improved slightly to €182 million, while polysilicon saw volumes improve throughout the quarter. It's EBITDA contribution came in at €71 million.

This quarter's results show us making good progress in our strategic path. We see significant cash flow generation on lower CapEx and a move towards a more specialized and differentiated product offering.

In chemicals, this is supported by significant volume growth and mix effect, while polysilicon gains market share in high-performance solar wafers, especially in mono applications. Our outlook for the chemical segments reflect substantially higher raw material costs than last year.

Sequentially, while looking from Q2 into Q3, some raw material prices seem to improve and we should see some early benefits from our pricing initiatives. In Silicones, we now expect an improved EBITDA margin over last year, coupled with high single-digit sales growth.

In addition, EBITDA in others now includes the equity result of Siltronic adjusted for FX from the purchase price allocation. Siltronic's raised outlook for the full year will also have a positive impact on us.

All in all, we are raising our full year EBITDA guidance for 2017 to a range between €900 million and €935 million. The upper end of the range constitutes that higher year results, excluding special income.

Our previous guidance was a mid-single-digit decrease. Dr.

Ohler, please.

Also welcome from my side. Let me just point you to the highlights of this quarter's reporting.

Starting on Page 3, with the P&L. What were the major factors that define sales this quarter.

Prices declined year-over-year, most pronounced in polysilicon but declining prices were also still a factor in silicones and polymers. Volume increases in our chemical businesses reported sales, with a small benefit from currency.

Q2 sales amounted to €1.2 billion just over last year and at the level of Q1. Looking at the gross margin, we see both good product mix and a strong cost performance.

Despite lot of headwinds from raw materials, our gross margin went up to 19.5% following high utilization of our plants and a good progress on productivity and cost initiatives. We completed in Q2 the purchase price allocation following the Siltronic transaction at the end of Q1.

The result from investments in joint venture and associates includes now our share of Siltronic's net income adjusted by purchase price allocation effects. Profits before tax came in at €76 million.

This is about 6% -- €6 million lower than in Q2 last year, but over 50% better than Q1 with a tax rate of just 20% following better results in overseas operations. This translates into a net income from continuing operations of €61 million.

Our balance sheet on Page 4 shows total assets of just over €7 billion, pension liabilities are now at €1.5 billion following a small increase in the discount rate. On Page 5, Silicones recorded Q2 sales of €549 million, up 7% over last year.

EBITDA increased by 18% to €111 million, resulting from high plant loadings, good cost performance and an improved product mix. The EBITDA margin in silicones increased from 18% to 20% in Q2.

Supply is globally tied for many silicon products. Demand for our products was strongest in construction, electronics and automotive as well as in wood care applications.

Our outlook for the full year improved. We now expect a high single-digit increase in full year sales and a better EBITDA margin in silicones, despite higher raw materials bill in the second half.

Sales in polymers, again, saw strong growth in volumes supported by strong demand in construction, nonwovens and carpet applications. Sales were up 3% to €335 million, 9% better than in Q1.

EBITDA expanded sequentially to €62 million from typical seasonality. While raw materials were still slightly up quarter-over-quarter, first price increases came into effect in Q2 on our sales side.

For the full year 2017, we continued to see significant headwinds in polymers from higher raw materials leading to a lower EBITDA for the full year. Most of these year-over-year effects will be visible in the second half as vinyl acetate had it's lowest [rate] in last year.

Q2 sales in BIOSOLUTIONS came in at €51 million, despite lower plant utilization in some product and adverse mix effect, EBITDA was essentially unchanged year-over-year at €9 million. For the full year, we continue to expect here an EBITDA contribution of about €30 million with integration costs from the acquisition in Spain expected later in the year.

Lower prices for polysilicon weighs on sales in Q2 sequentially. Sales came in at €247 million at minus 8%, while EBITDA was at the level of Q1.

We saw good progress in cost reductions from productivity and technical development. Shipments improved throughout the quarter as demand for our products went up.

We see this trend continuing into Q3 as July sales are coming in higher than sales in June. Our polysilicon outlook for 2017 remains unchanged with sales at prior year level.

We continued to see EBITDA, excluding special income, somewhat over 2016 as we continue to focus on cost reduction efforts. We see good performance on costs, but lower prices will hold us back in EBITDA.

I'm moving now on to Page 9. Our net financial debt now stands at €671 million, about €16 million lower than at the end of Q1, despite a dividend payment of €99 million.

Positive cash flow in Q2 and currency effects benefited our net debt position. Net cash flow increased from €53 million in Q1 to €94 million in Q2.

As you can see on Page 10, we upgraded our guidance for the full year following a very strong performance in silicones and better results indication from Siltronic. We now see full year EBITDA at €900 million to €935 million.

Our expected tax rate improved in the full year to below 30% as overseas operations improved their performance and utilized tax loss carryforwards. Looking back to the first half of the year, we saw chemicals with strong volumes.

We see silicones and polymers maintaining their momentum, despite higher raw material dose, with smaller impact sequentially from trailing effects on raw material prices and much larger impacts year-over-year. Polysilicon see strong demand for its products in July.

With this, let me hand you back to Rudi.

Thanks, Tobias. We are looking at a strong performance in Q2, despite tough comparisons over the last -- over last year in an unusually strong Q1 performance in chemicals.

Looking into current trading conditions, we continued to see a strong demand for our product portfolio. Our strategy in Silicones works out.

Here we combine upstream cost competitiveness with downstream excellence. Polymers does a good job in continuously expanding its available markets, moving closer to the customer, while at the same time focusing on productivity gains.

In polysilicon, we focus on high-quality applications and are looking at further efforts to reduce costs and have identified quite some potential. We will present on our businesses, the strategies and our initiatives at our Capital Markets Day on October 4th in London.

We are looking forward to seeing you there.

Operator, we're moving on to the Q&A now.

Three questions from my side, please. The first would be on Siltronic and your associate income.

And are you able to provide a guidance for that based on the outlook given today by Siltronic? And then the second question is on polymers.

You talked a bit about the margins and the raw material price effects. But will it be possible for you to pinpoint when you would see an inflection point in the squeeze from raw materials and give some quantitative data around it?

And then the last one would be on polysilicon. And -- where you also mentioned some byproduct mix effects that benefited second quarter, if you could explain that?

And also, maybe, if you could give us some more quantitative insights into the inventory effects and the shipments when compared to production?

So Patrick, this is Tobias speaking. I will your first two questions.

On Siltronic, we now include, as you said, the equity result minus the effects from the purchase price allocation. And we take a number that is moving, but I can tell you that even if there is an upgrade with a new consensus, our guidance would still be valid with the €900 million to €935 million in EBITDA.

So that's what I can say on this. And the second question, polymers margins, we had significant increased already in the first half, and we see that now some raw materials come down, but in other raw materials, we see trailing effect also from the contract structure.

So I would assume that raw materials will go up slightly in the third quarter. But I think, when you model, more important is that you do the year over year comparison and we had very low raw material prices in the second half of last year, that's why the spreads against last year even increases in the second half.

But as we have talked so much about raw materials, there is a lot of volatility and we see that some raw material prices actually come down in polymers.

Okay. I'll just quickly follow up on the Siltronic bids.

And given the equity income you report in the second quarter and based on the net income of Siltronic, is it a fair assumption that the PPA is around €6 million per quarter? Is that a fair run rate?

It's pretty fair, I would say. If you want to do the numbers, I would guide you at Page 30 of the quarterly release where we have the details for the purchase price allocation.

The step up in assets is €135 million and we depreciate that over, I mean, depending on the assets over 5 to 10 years. So if you take the midpoint of say 7 years, you come pretty close to your €6 million, may be more to €5 million.

The question on polysilicon, yes, as we reported last time, we increased inventory in our hubs. But over time, over the quarter, this was less and less, and of course, in the future, we always every now and then will take some efforts to keep our inventory at reasonable levels in order to be able to provide excellent service to our customers.

So I think, this was a strategic effort and I think it turned out to be right.

I have a couple of questions. I will start with polysilicon, please.

If my math is right then I would get to cost per kilogram of less than €10, an improvement quarter-over-quarter of more than 10%. Could you address that a little bit on whether this is about right, my math, and whether it's really possible that you have increased that fast within one quarter?

Or whether there were some one-offs in so that we cannot extrapolate the current cost base into the second half? And following on, on what you just said on this inventory step-up you made for strategic reasons.

Is it then fair to assume that in polysilicon, you are going to have higher volume deliveries in the second half than in the first half? And then coming to the others line.

I still do not fully understand what's all in there. So in Siltronic minus the PPAs, is there anything else we have to be aware of?

Or is that everything because the first quarter has shown minus €12 million and we would not get there with the Siltronic earnings. And maybe one question finally on polymers.

Sequentially, you said that Q3 might be somewhat higher in prices. However, most of your products are related to methanol, VAM, acetic acid, at least.

So I would guess that raw materials has come down over the second half. And you said that prices have increased.

So if you look sequentially first half, second half, is there any reason to believe that the second half will be materially weaker than the first half in EBITDA, I mean?

Let me start on the polysilicon. Yes, I think it's fair to assume that, of course, provided the market develops reasonably, our shipments will be higher in volume in the second half than in the first half.

On the specific cost, I mean, traditionally, we have not commented to any cost numbers. I just can tell you that some of the cost curves that have been published even though recently, I think we are wrong.

And you can really -- yes, you can assume that our cost-reduction efforts has been very successful over the last few years.

And there was nothing special in the same quarter. So whatever I have calculated, I do not have to be more negative on the cost base in the second half?

I mean, as I said, basically, no. I mean, you are right in your assumption, but as I think mentioned last time already, they are simply wrong or underrated cost-reduction assumptions out there.

So I think, we have been more successful in our cost-reduction efforts than some people think.

To your first question on the others line. We typically have some fluctuation quarter-over-quarter in this other line.

But for the full year, the assumption is still fair. As always, it should be EBITDA 0.

And to this, we need to add the equity result adjusted for the PPA fact of Siltronic now and this will show up in the full year. We did not have any equity result in the first quarter.

It's the first time that we reported in the second quarter. With respect to the raw materials, I had the question before on polymers where I talked a little bit about trailing effect in some of our contracts, which might lead to even slightly higher prices in Q3.

If I now take silicones and you were asking is -- after -- going after methanol. I mean, methanol definitely comes down from it's very high levels, but we, on the other hand, see that silicon metal prices at least in our supply portfolio will go up sequentially because we had a mitigation effect of the overall market price increase from our contract structure that is getting weaker in the second half.

And I was basically -- Methanol also referring to polymers because VAM is linked to methanol and acetic acid also linked to methanol. So I would expected these 2 to follow the sharp decline we have seen in methanol?

Am I right?

Yes, you are right. You are absolutely right.

I mean, methanol is driving them and VAM, we were a little bit concerned in -- meanwhile, when many plants were in turnaround situations, it's good news that all of them came back without any meaningful delay so that actually also let to then prices recovering or easing again. Your question is what is that impact for the second half?

I think when modeling our full year performance, you always need to take into account that our Q4 is a little bit weaker than the Q3. So just to add first half and second half typically does not, yes, bring the right results.

Operator, we seem to have an issue here. Please -- the next question is from Chetan Udeshi from JPMorgan.

Can I follow up on silicones? Margin has been doing much better, despite raw material headwinds.

And you mentioned mix as one of the drivers. How sustainable is this mix going forward and really how sustainable is the margin?

And second point, I think, you mentioned the others line going forward would include the equity contribution from Siltronic, did I hear that correctly? And why are you including that in the EBITDA line rather than just having it below the EBIT line as a associate income?

And last question is, there is a big increase in your selling expenses and G&A on a year-on-year basis, and can you just explain what is driving that?

Chetan, I will go through the questions. First question, silicones is doing much better, that's how you frame it.

And it's coming, as we have said, from the good cost performance but also from a very good product mix. So our specialty strategy actually pays off and we see that sustainable.

So we will try with all efforts to keep that momentum. And as we have said, we have lifted our full year guidance in silicones.

So we see now an improved margin over last year. So EBITDA maybe up low double-digit while it stays up high single-digit.

With respect to the segment reporting and reporting of the equity income, I mean that's how we do it. I think that's the market standard and we follow that.

So we show our equity results of all participations in the EBITDA and that's why it shows up there. And if you need help for modeling, I think, please contact IR, and you just take it out of your way of doing your modeling.

So welcome to that. And the last question was on the SG&A increase.

If you would look at SG&A, sequentially, you wouldn't see that entry. So it's more an effect that the SG&A of Q2 in 2016 was artificially low from just some special effects.

So there is nothing to be concerned about SG&A.

I just had a question on polysilicon outlook. So for the second half, we've seen a huge number for installations in China, suggesting -- underlining strong H1 demand.

You were expecting higher deliveries in the second half. How can we square that with overall demand?

And do you see a very negative pricing environment developing in the second half?

Well, we do not specifically see a pricing issue developing in the second half. Actually, we think that, let's say, the -- the market volume totally could increase, if everything goes right.

It actually increased our forecast. We originally said, we expect the installation market to be between 75 and 85, and now we think it could even go up to 90 gigawatts, potentially.

It really depends on individual markets and on China, of course, but also on the United States. And of course, I mean, the business has been volatile and -- but we do not see any specific issues at this point.

At this point, as we said, we see a strong demand.

And can I confirm that you will know that you have already built your two months of inventory therefore not require additional inventory in polysilicon?

The -- we have reported on our inventory buildup in the first and second quarter of this year. And as I said before, we've build a chart, our inventory a little bit up, a little bit down, in the future, but this is something that is within the ordinary course of business.

And I just had one question on the -- your comments on the cost position in polysilicon. I'm not sure how much you're going to be willing to tell us.

But I just wanted to try and get a bit color of what you might have been doing. And perhaps whether the -- and we've long seen productivity improvements at the European facilities.

I mean, is the -- is a lot of the improvement due to the U.S. now that the Tennessee facility has been operating for a while, you are finding operating improvements there?

And -- or are you seeing similar -- a step up in productivity improvements in Europe as well? And perhaps you could give us an idea, maybe of the relative cost position of U.S.

versus Europe as it stands today, please?

We certainly have seen improvements in the cost in all our facilities. As you know, we have 3, 2 in Germany and 1 in the U.S.

We do not report on the efforts on the individual facilities. But, yes, we are working hard to reduce our cost because, aside from quality, this is the competitive issue in polysilicon this year has been over the last year and then certainly will be for the time to come.

But I just give you a number on maintenance shutdowns, for example. Some of our competitors shutdown their position holds once a year and we shut them down once every 5 years?

There are productivity advantages in something like that. And then we certainly we will keep on working on issues like that.

And if I can just push a little further on the U.S. situation, just trying to understand you, where you are on sort of experience curve?

And has -- have you seen big -- when Tennessee came on onstream, obviously, it was a cost advantage from an energy perspective. But do you see, as you're getting -- moving along the experience curve there, greatest stride in improving the productivity that's on server?

Well, when you start up a facility like that, as you can imagine, the first year is tough. The second year -- in the second year, you already have gained the experience, but you still can make significant improvements.

But sometimes, we surprise ourselves in improving the cost position and also in established facilities. And by the way, the same in other parts of our chemical businesses, for example, in our [indiscernible] operations just the -- yes, the operational excellence in these facilities is 1 of the reasons for good cost position and for the profitability of the business divisions in the company.

And this is why this is such a major effort to continuously work on these things. And as I said, of course, in the new facility, the relative improvements are higher than in established, but there has to be improvement in established facilities as well.

I have two questions. And sorry for coming back on polysilicon, again.

I still struggled to understand the math behind the profitability in Q2 and the guidance you're giving for the full year. I understand the cost savings is still one part.

I'm just asking myself how much of the inventory situation and the high utilization rates and the profit you book when you put product on inventory has contributed to the comparably good results in Q2 because if all of the benefits in Q2 that help to keep your EBITDA flat quarter-over-quarter, is actually from cost savings than your guidance for the full year somehow does not make sense anymore. So could you please clarify that?

And I will wait with my second question?

There were certainly a little bit of help on the inventory buildup, of course. I think, the important part of the answer is, we certainly have built caution into the second half because we just -- the business has been volatile and we simply cannot make precise predictions for the second half.

I think in the chemical businesses, it's much more reliable in terms of forecasting the business, of course, provided there is no major worldwide economic problems. But in polysilicon, just from experience, yes, volatility is high and we want to care for that.

Right. That's fair enough.

And sorry to sticking to that. But if I look at your inventories development in Q1 and Q2, so you had 40 million inventory built up in your free cash flow in Q1 and 100 million in Q2.

Could you explain a little bit the split of the rise in the inventories in Q2? Is the majority, they are not coming from polysilicon, that is what I would have understand from your answer.

Thomas, I take over. Tobias here.

I mean, the impact on cash flow in Q2, I mean, the number you mentioned is a blend of all divisions. And so it's not only polysilicon, we also had some inventory increase in silicones and then there is an additional effect from exchange rate because we -- with the stronger euro at the quarterly close, we need to adjust for the exchange rate impact on our inventories, then that shows up in the cash flow statement.

And as we have globalized business, I mean, including silicones, including polymers, I mean, this number is higher also for FX reasons.

Right. This is very, very helpful.

The second question is actually very, very easy, I hope. And it's on silicones.

And you have said on 1 of the questions that you see the margin development in silicones as rather sustainable. I'm just wondering, if you could expand on that?

I suppose it's not just because of the demand situation. So do you think this capacity closures in China, is this sustainable then?

And do you expect more to come eventually? If you could expand on that, that would be helpful?

Well, there are several reasons for the improvement of the silicones business. One thing is, of course, [indiscernible] capacity closures in Europe, for example.

Then there is the overall demand because of the economic development of the world and in China, especially. Yes, there is an impact on the closures of some of the smaller plants because of their environmental and safety impacts.

And we see a strong effort from the central government in China to make sure that the environmental and safety performance of the chemical plants get somewhat more up to world standard. That's a clear effort and we certainly support that in order to improve the levelness of the playing field in the chemical industry and we certainly welcome that in the polysilicon business as well.

I think this is important not only for the business conditions, but also for the people who work in these plants and for the people who live around these plants. But that certainly has also an impact on the pricing situation for base materials in China.

Thank you, Operator. Thank you all for joining us today and for your interest in Wacker Chemie.

We are looking forward to further discussions with you as the quarter progresses. We will be back with the conference call on Q3 on October 26th.

Goodbye.